Over the past few months, the U.S. breathed a collective sigh of relief in the fight against COVID-19. In late March and early April, uncertainty and fear dominated the headlines and markets. JP Morgan predicted a 20 percent unemployment rate for Q2 and U.S. cities locked down in an attempt to prevent the propagation of New York’s shocking hospital scenes. Since the early days of April, the expense to human life and to the U.S. economy has grown at a considerably lower rate than initial projections. However, with new cases sprouting up across several states and some reopening orders placed on pause, the nation still faces a formidable challenge in suppressing the virus. We cannot discount the nearly 2.7 million cases in the U.S., but government and health officials are now equipped with the fruits of experience: better tracking information, increased communication with hospital systems, a coordinated policy response, and a new treatment to reduce the length of hospital stays. For the U.S. multifamily investment market, a similar narrative of increasing optimism shows that with each passing day, and rent payment processed, multifamily real estate is once again rising to its long-held expectation as a stable and resilient investment.
The expected returns produced by multifamily assets are largely a function of two things: price and expected future income growth. In March 2020, both of these factors fell victim to immense uncertainty. Pricing guidance vanished as the capital markets froze and projected income growth became precarious as questions mounted on the ability of tenants to make rent payments, on the future of domestic migration within the U.S., and on the future of jobs as unemployment skyrocketed. Since March, much of this fog of uncertainty has lifted surrounding these questions.
Earlier in June, The Federal Reserve estimated that the national unemployment rate will fall to roughly 9.3 percent by year-end and 6.5 percent by Q4 of 2021. In CONTI’s Texas market, the state unemployment rate fell to 13 percent in May, below the U.S. rate of 13.3 percent. In the populous and economically diverse metro areas of San Antonio, DFW, and Austin, unemployment fell to respective rates of 12.7, 12.3, and 11.4 percent in May. Although the economic effects of the coronavirus are far from over, Texas is weathering the storm relatively well. These strong macroeconomic indicators allow greater confidence for projecting future income growth of assets, but these indicators would be meaningless if renters did not continue to meet their contractual obligation to pay rent.
At the onset of the coronavirus panic in March, the U.S. federal government effectively erased this obligation by temporarily eliminating important tools that multifamily operators use to enforce contracts with tenants; tools like penalties for late rent payments and evictions for non-payment. While these tools are set to resume by September, the multifamily industry heavily scrutinized monthly rent payments since March. Despite the initial fear of tenants widely ignoring their rents without penalty, payment data over the past 3 months is overwhelmingly positive. The National Multifamily Housing Council’s analysis of over 11 million U.S. apartment units shows that as of June 27th, 94.2 percent of tenants have made a full or partial rent payment for the month.
With positive U.S. economic indicators and strong cooperation from tenants, the industry’s attention turns to solidifying future income (rent) growth projections. According to data provider, Yardi Matrix, May rents increased 0.8 percent year-over-year on a national scale, however; average rents fell in both April and March. Typically, the spring leasing season buoys rent growth for the year, so these declines likely mean flat or contracting rents across the nation for 2020. Yardi also reports that the Renter-by-Necessity cohort, a segment of the multifamily market that routinely includes a large portion of Workforce assets, outperformed the “Lifestyle” or luxury asset class in terms of both year-over-year and month-over-month rent growth in May. While this national data provides a useful framework for analyzing the multifamily investment market, a nuanced perspective reveals stark regional differences within the U.S.